As I have noted in a prior post, 2018 was a very eventful year in the world of directors and officers liability. In the following guest post, written by Kelly S. Johnson, Esq., Claims Counsel, Hiscox USA; Elan Kandel, Esq., Bailey Cavalieri; and Jennifer Lewis, Esq., Bailey Cavalieri, the authors make it clear that 2018 was also a very eventful year for important D&O insurance coverage decisions. I would like to thank the authors for allowing me to publish their article. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ guest post.



As we begin 2019, we take a moment to look back at the key insurance coverage decisions from 2018 involving perennial coverage issues for D&O insurers and policyholders.


D&O policies typically specify that they only provide coverage for certain individuals associated with an insured entity to the extent the wrongdoing allegedly committed by the individuals in their “insured capacity.”  Coverage issues arise when an individual insured under a D&O policy is sued in an insured and uninsured capacity.  For example, in Gleason v. Markel Am. Ins. Co., 2018 U.S. Dist. LEXIS 11608 (E.D. Tex. Jan. 24, 2018), the policy at issue covered individuals acting in their insured capacity as an officer or director of the insured entity.  The indirect owners of the insured entity were sued in connection with their attempt to sell their interests in the holding companies of the insured entity.  The complaint against the individuals did not specify which capacity the alleged wrongdoing was asserted against the insureds (e.g., as sellers of their equity interests or as directors and officers of the insured entity).  Because the complaint did not specify, the court found that it was possible that certain of the allegations were made against the insureds in their insured capacity.  Moreover, the court noted that the policy did not require that the alleged wrongdoing be committed “solely” in an insured capacity.  Accordingly, the court found that the complaint triggered coverage for the individuals under the policy.

While the insuring agreement of a D&O policy typically makes clear that it only covers acts committed in an insured capacity, some D&O policies also include a specific exclusion for wrongful conduct committed by an individual insured in an uninsured capacity.  Such an exclusion was interpreted in Goggin v. National Union Fire Ins. Co., 2018 Del. Super. LEXIS 1533 (Sup. Ct. Del. Nov. 30, 2018).  In Goggin, the policy excluded coverage for claims “alleging, arising out of, based upon or attributable to any actual or alleged act or omission of an Individual Insured serving in any capacity, other than as an Executive or Employee of a Company.”  The underlying claim alleged that two directors of the insured entity, U.S. Coal, breached their fiduciary duties to U.S. Coal by engaging in self-interested dealings at U.S. Coal’s expense.  The claim alleged that the directors created investment vehicles to provide debt purchase and other capital restructuring to U.S. Coal.  Based on the “arising out of” language in the exclusion, the court applied a “but-for” test to determine whether the allegations against the individuals arose out of their uninsured capacities with the investment vehicles.  Based on that analysis, the court found that the claims against the insureds would not exist but-for their positions in the uninsured investment vehicles, i.e., in an uninsured capacity.  Therefore, the court found the underlying claim was excluded by the uninsured capacity exclusion.  In doing so, the court rejected the insureds’ argument that the exclusion was meant to target conduct carried out in a wholly uninsured capacity.

Similar to the exclusion in Goggin, in Woodspring Hotels LLC v. Nat’l Union Fire Ins. Co., 2018 Del. Super. LEXIS 186 (Del. Sup. Ct. May 2, 2018), the policy at issue excluded coverage for claims arising out of acts or omissions “of an Individual Insured serving in any capacity, other than as an Employee, Executive or Outside Executive of an Outside Entity.”  In the underlying claim, the insured, WoodSpring, and its employee, Burnadette Ruby, were sued by Ms. Ruby’s former employer, alleging theft and misuse of trade secrets.  National Union denied coverage for the entire claim based on intellectual property and contract exclusions.  National Union initially provided a defense to Ms. Ruby, but then denied coverage for her based on the uninsured capacity exclusion.  In coverage litigation, the court found that National Union had a duty to defend Ms. Ruby because the underlying complaint included allegations against her in her capacity as an employee of WoodSpring and related to her conduct as an employee of WoodSpring.  For example, the complaint alleged that Ms. Ruby, as Vice President of Sales for WoodSpring, provided members of the WoodSpring sales team with copies of documents used by her former employer’s sales team.  Therefore, the court found National Union could not deny coverage for Ms. Ruby under the uninsured capacity exclusion.


The definition of loss in most D&O insurance policies excludes amounts that are uninsurable as a matter of law.  Many jurisdictions have held that disgorgement is uninsurable as a matter of law based on the public policy of not allowing an insured to benefit from its own wrongdoing.  In 2018, two state courts considered New York public policy regarding the insurability of disgorgement.

In In re TIAA-CREF Ins. Appeals, 192 A.3d 554 (Del. 2018), the Supreme Court of Delaware was asked to consider whether certain class action settlements constituted disgorgements such that they were uninsurable under New York law.  In the underlying claim, the insured, TIAA-CREF, was sued for improperly failing to credit the accounts of its customers with investment gains they believed they were entitled to.  The Supreme Court of Delaware found that the public policy of New York only bars the insurability of disgorgement where “the insured’s wrongdoing resulted in the ill-gotten gains.”  Id., at *7.  The Supreme Court of Delaware explained that “New York public policy prohibits the enforcement of insurance agreements in cases involving disgorgement where the payment is conclusively linked, in some fashion, to improperly acquired funds in the hands of the insured.”  Id., at *6.  Notably, in the underlying claim, TIAA-CREF had distributed the allegedly withheld investment gains to all investors and did not profit from those gains.  Therefore, the Supreme Court of Delaware found that although TIAA-CREF had been ordered to disgorge funds, the disgorgement at issue did not result in ill-gotten gains from the insured’s wrongdoing.  Accordingly, the court determined the disgorgement was not uninsurable under New York law.

In contrast, in J.P. Morgan Sec., Inc. v. Vigilant Ins. Co., 166 A.D.3d 1 (N.Y. App. Div. 1 2018), a New York court found that an SEC disgorgement payment did not constitute insurable “Loss” regardless of whether the underlying amounts benefited the insured.  The insureds argued that under New York law the SEC disgorgement was insurable because the insureds did not benefit from the amounts they were being ordered to disgorge.  The court disagreed.  The court relied on a recent decision from the Supreme Court of the United States, Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635 (2017), in which the Supreme Court defined the nature of SEC disgorgement as a “penalty.”  Based on Kokesh, the court found that the SEC disgorgement was an uninsurable penalty and therefore, did not fall within the definition of “Loss,” regardless of whether the insured obtained ill-gotten gains.  The court explained that “to allow a wrongdoer to pass on its loss emanating from the disgorgement payment to the insurer, thereby shielding the wrongdoer from the consequences of its deliberate malfeasance, undermines this goal.”  Id., at 8.

Professional Services

D&O policies typically exclude coverage for loss arising out of the performance of professional services.  The idea is that the claims excluded by a professional services exclusion would be covered under a professional liability or “E&O” policy issued to the same insured.  Accordingly, the issue of what constitutes a “professional service” can arise in the context of the exclusion in a D&O policy or the scope of coverage provided by an E&O policy.  Or, as it did in Beazley Ins. Co. v. Ace Am. Ins. Co., 800 F.3d 64 (2nd Cir. 2018), in both contexts.

In Beazley, the insured had coverage under D&O and E&O policies.  The D&O policy excluded coverage for any Claim “by or on behalf of a customer or client of the Company, alleging, based upon, arising out of, or attributable to the rendering or failure to render professional services.  The policy did not define “professional services” or “customer or client.”  The insured at issue was NASDAQ, the company that provides the NASDAQ trading platform.  NASDAQ was sued by various retail investors in connection with technical difficulties during the Facebook Initial Public Offering.  NASDAQ submitted notice of the lawsuits to its E&O and D&O carriers.  The D&O carriers denied coverage on the basis of the professional services exclusion and the E&O carriers funded the settlement of the lawsuits.  Beazley, one of NASDAQ’s E&O carriers, then sought a declaration of coverage under the D&O policies.  Beazley argued the retail investors that brought the underlying lawsuits did not constitute “customers or clients” of NASDAQ and that the claims in the underlying litigation did not arise out of the rendering of or failure to render professional services.  In affirming the district court’s decision, the Second Circuit held that the retail investors constituted “customers or clients” of NASDAQ because, relying on custom and usage of the term “customer,” retail investors are considered to be “customers” of a stock exchange.  Further, the Second Circuit found that the underlying litigation arose out of NASDAQ’s professional services because in order to prevail on their securities claims, the plaintiffs would have had to show that NASDAQ failed to properly execute the purchases and sale orders and deliver timely confirmations.

Also in 2018, the Ninth Circuit interpreted the definition of “professional services” in the context of a D&O policy exclusion.  In HotChalk, Inc. v. Scottsdale Ins. Co., 736 F. App’x 646, 648 (9th Circuit 2018), the policy excluded coverage for claims “alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the rendering of or failing to render professional services.”  The insured, HotChalk, provided technology and support services to universities seeking to expand online programs, including the marketing of those programs.  HotChalk’s employees filed a qui tam lawsuit alleging HotChalk violated the Higher Education Act by providing incentive-based payments to employees in charge of recruiting students to the online programs.  The parties and the court agreed the insured’s technology and support services constituted professional services.  The only question was whether the underlying claim arose out of the insured’ rendering of or failure to render those professional services.  HotChalk argued the claim was based on its employee compensation, not its professional services.  However, the court relied on the broad-form language of the professional services exclusion to find that the underlying claim was excluded because it “derived from the fact that [HotChalk’s] professional services caused ineligible students and ineligible universities to submit claims for federal financial aid.”

With respect to the scope of coverage under E&O policies, two federal courts considered whether certain conduct constituted “professional services” such that an insured triggered coverage under an E&O policy.  First, in Illinois Union Ins. Co. v. US Bus Charter & Limo Inc., 291 F. Supp. 3d 286 (E.D.N.Y. 2018), the Eastern District of New York considered whether unsolicited text messages sent by the insured, a “bus charter broker,” constituted professional services under a professional liability policy.  The court looked to dictionary definitions and a federal statute to determine what the professional services of a “bus charter broker” entailed.  The court determined “bus charter broker” services included advertising bus transportation to specific groups of people.  In the underlying claim, the insured was sued for alleged violations of the Telephone Consumer Protection Act by sending unsolicited text messages that advertised rentals of buses, limos & mini-buses.  The court found that these text messages clearly represented the insured carrying out its professional services.  According to the court, it did not matter that the insured may have also been advertising for itself at the same time because the advertisement of bus services is an “essential part” of the bundle of services provided by the insured to its customers.  Further, the court found that it was irrelevant that the insured did not collect a fee for the advertisement itself, because the services being offered through the advertisement were being offered for a fee.

What is a Claim?

Finally, 2018 would not have been complete without at least a few cases discussing what constitutes a “Claim” under a D&O policy.

In Millennium Labs v. Allied World Assur. Co. (U.S.), 726 F. App’x 571 (9th Cir. 2018), the Ninth Circuit weighed in on this perennial issue. The Ninth Circuit held that a policy’s definition of “Claim” did not support a finding that a Department of Justice investigation constituted a single “Claim.”  Rather, the Ninth Circuit explained that each of the wrongful acts, errors or omissions alleged in the investigation were separate claims forming the investigation.  According to the Ninth Circuit, the policy’s definitions of “Claim” related to “temporal certainty” rather than scope.  Id., at 574–75.  The policy at issue defined “Claim” to include, a “formal civil or criminal investigation of an Insured Person, which is commenced by the filing or issuance of a . . . subpoena . . . identifying such Insured as a person against whom a proceeding . . . may be commenced,” and “formal administrative or regulatory investigation of an Insured, which is commenced by the filing or issuance of a . . .  subpoena . . . identifying an Insured as a person or entity against whom a proceeding . . . may be commenced.”  Millennium Labs, Inc. v. Allied World Ins. Co. (U.S.), 135 F. Supp. 3d 1165, 1168 (S.D. Cal. 2015).  Therefore, the Ninth Circuit broke the DOJ Investigation down into seven separate “Claims” based on the alleged wrongful acts in the investigation in order to determine whether any of the “Claims” were excluded by a “Specific Claims Exclusion” in the policy.

In Jalbert v. Zurich Services Corp., 325 F. Supp. 3d 212 (D. Mass. 2018), the District of Massachusetts considered whether an “Order Directing Private Investigation and Designating Officers to Take Testimony” from the Securities Exchange Commission constituted a claim first made prior to the relevant insurers’ policy period.  The policies at issue deemed a formal investigation to be a claim first made when an insured is “identified by name in an order of investigation, subpoena, Wells notice or target letter . . .  as someone against whom a civil, criminal, administrative or regulatory proceeding may be brought.”  Id., at 214.  The court found that, under the unambiguous “deemed-made” provision, the SEC “Order” was deemed made under the policy when it was issued because it identified the named insured as a subject of the investigation and included serious allegations of potential wrongdoing by the insured.  The court rejected the insurers’ argument that the order did not identify that claim may be brought against an insured because, based on the allegations in the SEC Order, the SEC Order clearly indicated the SEC was investigating information that tended to show the insured violated numerous federal laws.  The court also found that the SEC Order clearly constituted an “order of investigation” under the deemed-made provision.

Finally, in Crowley Mar. Corp. v. Nat’l Union Fire Ins. Co., 307 F. Supp. 3d 1286 (M.D. Fla. 2018), the Middle District of Florida considered whether an Executive and Organization Liability policy provided coverage for a criminal investigation of an insured individual where the affidavit identifying the individual as a target of the investigation was not unsealed or reported to the insurer until after the relevant policy period had expired.  The policy provided coverage for criminal investigations of individual insureds where they had been identified in writing as the target of an investigation.  In 2008, the insured provided notice of a search warrant issued to it by the Department of Justice.  The insurer advised that the investigation did not constitute a claim because the search warrant did not identify any individual insureds as the target of the investigation.  At the trial of an executive of the insured, after the expiration of the policy period, an affidavit used by the DOJ to obtain the 2008 search warrant was introduced into evidence.  The affidavit showed that the executive had been a target of the investigation since 2008.  The insured sued its insurer arguing that the affidavit showed an individual insured had been the target of the investigation since before the policy period expired.  The court found the insured was not entitled to coverage under the “claims-made-and-reported” policy because the claim based on the affidavit was not reported to the insurer until after the expiration of the policy period.

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If the past is prologue, we would expect to see courts address these perennial coverage issues again in 2019.  The case law that made this year memorable will certainly influence coverage decisions in 2019.